FX markets to see less central bank involvement

Central banks will take a back seat in currency markets this year, according to Paul Robson, head of G10 FX strategy, EMEA, NatWest Markets.

“The age of the call to the super central banker who comes over the hill and the cavalry arrives with further easing to support growth is one that is coming to an end,” said Robson at the JCRA’s Annual Economic Overview briefing in central London last week.

“Normally when we talk about currencies we are obsessed by central banks – what is the ECB going to do? What is the Bank of England going to do? Are they going to have a cycle in terms of interest rate cutting or tightening? But we think as we go forward this year it is going to be more about fiscal policy than monetary policy.”

On January 30, the Bank of England announced that it will keep interest rates unchanged at 0.75 percent. A day earlier the Federal Reserve said it would also maintain current interest rates.

The announcements come after the European Central Bank (ECB) launched of a review of its monetary policy strategy which is expected to be complete by the end of the year. The review will look at the monetary policy toolkit used by the ECB to bring price stability.

“People have got in their mindset that Europe can only grow by about half a percent, or even that the next recession is just around the corner for the Euro,” said Robson.

“But you are going to get noticeably easier fiscal policy in Europe this year, and for the Euro we think it is just the start of a journey as markets understand… that fiscal policy is going to start to be used in Europe over the next couple of years.”

Also speaking on the panel, Ian Shepherdson, chief economist, Pantheon Macroeconomics said that while markets expect the Federal Reserve to cut interest rates this year, it is more likely rates will be maintained because of the country’s general election.

On January 30 the US Treasury yield curve became inverted, Bloomberg reported. While Shepherdson said this had created excitement in the market about the potential of a near term recession in the US, it was more reflective of the ongoing developments with the coronavirus outbreak.

“The US is not on the verge of a recession. It’s going to grow hopefully this year around two percent which is the average pretty much since the crash,” said Shepherdson.

But Robson’s outlook for the US is more pessimistic.

“When we look at the US economy, when we talk about weakness in the dollar potentially in 2020, a turn at the end of dollar dominance will be about relative growth,” said Robson.

“We think that the dollar dominance that we’ve seen over the past couple of years is challenged. We think that that comes because of the US presidential election. We think it is a story of monetary policy, we think it is a function of where do investors think that they are getting most rewarded putting their savings. And if you have a US economy that is slowing, yields are coming lower, there is more uncertainty about the outlook, then the dollar weakens.”